Independence after Gary Banks

The decline of the terms of trade and the need to revive productivity growth have made the question of the independence of the Productivity Commission one of the most pressing issues in economic policy.

The commission’s chairman, Gary Banks, whose independent critique of government policy undoubtedly got up the noses of unions and some senior ministers, has unexpectedly announced his early retirement.

This has raised fears that the government intends to replace Banks with someone more “flexible”, someone who would enjoy the support of the Australian Workers Union and the Construction, Forestry, Mining and Energy Union (CFMEU) which recently described the commission as a taxpayer-funded right-wing think tank.

The decision on Banks’s replacement is too important to be made solely by a minority government within 12 months of a desperate struggle for its electoral survival.

The Productivity Commission is the linear descendant of the Industries Assistance Commission, or IAC, established by the Whitlam government in the 1970s. The independent, open inquiries and the often unwelcome public advice to governments of the IAC and its successors played a vital role in the economic reforms of the Hawke, Keating and Howard governments.

Now a new generation of political leaders must revive that spirit of reform because, without it, Australian living standards will again slip down the international scale.

With mineral export prices now in decline, Australians must look primarily to productivity growth to generate rising real incomes.

The reform and policy discipline needed to generate that productivity growth is a politically difficult, long-term project. The policy decisions will take several parliamentary terms to have a demonstrable effect.

The new commission chairman should be a bipartisan choice.

For both Julia Gillard and Tony Abbott the bipartisan appointment of a high quality replacement for Banks would be tangible evidence of their understanding of the need for disciplined, longer-term economic policies.

That ought to be an attractive proposition for both politicians. Election years rarely allow political leaders the luxury of even a nod in the direction of good economic policy.

Yet a subtle public commitment to a strong and independent Productivity Commission would give them both more licence to indulge in their election-year profligacy. The profligacy then would be seen by opinion leaders as a departure from the more responsible rule, rather than the rule itself.

In fact, a strong, independent Productivity Commission is a great asset for any government. Most importantly it helps to create the political space in which governments can make the difficult policy decisions needed to produce stronger income growth over the medium term.

That’s the essential service the commission’s predecessors provided to Bob Hawke and Paul Keating.

It exposed the cost to the economy of decades of deals with vested interests, and showed the potential benefits of competition and reform.

It didn’t settle any of the bitter arguments, but it told the public who to believe. And that allowed Hawke and Keating to get on with the reforms for which Labor was rewarded with 13 years of government.

However, the commission plays a nuanced role. It protects the government against the inevitable pressure, often from its own supporters, to make really bad decisions.

When rent-seeking manufacturers or their unions demand urgent, economically damaging action against competition and structural change, an urgent inquiry by the Productivity Commission is the government’s first line of defence.

Moreover, as the Fraser government showed, there is no need for the government to accept the commission’s hard-headed advice.

Rather it can use the commission’s advice to negotiate a compromise deal. Or it can reject the advice entirely and make a double hero of itself: not only has it given the rent-seekers what they demanded, it has overruled the advice of the commission!

There always will be appalling decisions. Good government is about keeping the damage to a minimum.

That means rationing the economic indulgences and making the recipients feel very blessed while, at the same time, ensuring that the core of economic policy decisions promote productivity and income growth for the wider economy.

And that is exactly what an independent Productivity Commission can help a government do.

The Australian Financial Review

BY Alan Mitchell

Alan has been economics editor of The Australian Financial
Review since 2005. Prior to this, he was associate editor of the AFR
(1991 - 2005) and The Sydney Morning Herald (1983 - 1991). Alan has
also held positions as business correspondent for the ABC as well as
deputy business editor and senior writer for the SMH.

BY Alan Mitchell

Alan has been economics editor of The Australian Financial
Review since 2005. Prior to this, he was associate editor of the AFR
(1991 - 2005) and The Sydney Morning Herald (1983 - 1991). Alan has
also held positions as business correspondent for the ABC as well as
deputy business editor and senior writer for the SMH.